By Stuart Talman, XE currency strategist
A busy 24 hours has delivered the week's global headline event: US CPI for July which has printed in-line with consensus forecasts, leaving the market to ponder whether the Fed cuts by 25 or 50bps at the 18 September FOMC meeting. The week's domestic headliner, the RBNZ meeting, produced a dovish cut, the OCR lowered by a quarter percent to 5.25%. UK CPI was also released, printing below expectations but with the annualised headline rate higher than the month prior, the Bank of England may refrain from a follow-up cut in September.
The New Zealand dollar is the conspicuous laggard amongst its G10 peers, reversing all of the previous day's gains, dropping by over one percent to fall within a couple of pips of 60 US cents having ascended to four week highs in the 0.6080's leading up to the RBNZ interest rate decision. The key takeaways:
- RBNZ cuts the OCR by 25bps to 5.25%
- Projected OCR track significantly lowered
- Growth rate sharply downgraded
Considering market pricing had assigned a near 70% implied probability to the quarter point cut, yet a clear majority of polled analysts (by both Reuters and Bloomberg) favoured an on-hold decision, the outcome of yesterday's meeting was regarded as finely balanced.
However following the release of the accompanying statement and summary of record of meeting, it was clear that Governor Orr and his fellow board members unanimously backed the decision to commence the easing cycle, delivering the first cut in over four years. Via the summary record of meeting:
The Committee noted that the weakening in domestic economic activity observed in the July Monetary Policy Review has become more pronounced and broad-based. Headline inflation has declined, and business inflation expectations have returned to around 2 percent at medium-and longer-term horizons. Committee members agreed that monetary policy restraint can now begin to ease. The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point.
The deterioration in high frequency data (PMI, PSI, retail sales) since the May MPS (the outcome of which was a hawkish hold), in addition to the decline in the June quarter CPI has compelled the RBNZ to commence its easing cycle markedly earlier than anyone would have projected a few months back. Recall, at the May MPS, the OCR track was marginally lifted, signalling the RBNZ's bias to tighten further should inflation remain elevated. At that point, the first rate cut was not projected until August 2025.
The RBNZ's updated GDP forecasts were sharply downgraded, projecting growth to decline by -0.5% quarter-on-quarter and -0.2% in the June and September quarters, thereby expecting a technical recession.
The updated OCR track locks in follow-up quarter point cuts at each of the next three meetings (OCT, NOV, FEB) with the policy rate falling to 3.85% by the end of 2025. Previously the 2025-end OCT projection was at 5.14%.
In his press conference, Governor Orr sighted the recent deterioration in a range of activity indicators and confirmed the board had now obtained confidence that inflation will return to the bank's 1%-3% target band within the current quarter.
The New Zealand dollar's reaction?
An immediate circa 50pip plunge from the 0.6070's into the 0.6020's before further selling later in the Asian session saw NZD/USD extend lower to within a few pips of 60 US cents. Despite an encouraging US CPI report, the Kiwi has failed to rebound through overnight trade, reversing a 30-pip retracement, looking vulnerable to a dip back below 0.6000.
This week's swing highs in the 0.6080's will likely remain untested in the short-term, however could be challenged in the lead up the September FOMC meeting should the US macro data flow print with a downside bias, increasing odds the Fed opts for a 50bps cut.
Printing in-line at 0.2% month-on-month, equating to annualised core CPI falling from 3.3% to 3.2%, the Fed will welcome the July data which provides further evidence inflation is approaching the 2% target. The 3-month annualise core rate sits at 1.6%. Headline CPI at 2.9% delivered the first "2" handle since March 2021.
Current market pricing assigns a 65/35 implied probability split in favour of 25bps cut over 50bps. August's CPI data and jobs reports will likely determine the magnitude of the Fed's fist cut.
Looking to the day ahead, this week's steady flow of tier 1 data continues with the release of GDP for Japan and the UK, Aussie jobs numbers, China activity data, and retail sales and weekly jobless claims out of the US.
A solid jobs report across the Tasman would place further downside pressure on NZD/AUD which has shed over 100pips this week, falling from around 0.9170 through 0.9060 at Wednesday's lows. An upside beat for headline jobs growth for the Australian labour market would likely push the antipodean cross closer to sub-0.90 levels.
As for the Kiwi against the dollar, we suspect NZD/USD will re-test sub-0.6000 levels with a potential rebound contingent on the US retail sales number.
Stuart Talman is Director of Sales at XE. You can contact him here.
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